Home»Economy»World Economy Projected To Shrink For First Time Since 2009 As Coronavirus Plays Havoc With Global Supply Chains

World Economy Projected To Shrink For First Time Since 2009 As Coronavirus Plays Havoc With Global Supply Chains

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For more than a decade, the global economy has steadily grown quarter after quarter, but it looks like that streak is about to come to a very abrupt ending.  The coronavirus outbreak in China has brought the Chinese economy to a virtual standstill, and as a result, critical supply chains are in a state of chaos all over the world.  And since it doesn’t look like the Chinese economy will be able to return to normal for an extended period of time, it appears that a worldwide economic slowdown is imminent.  I warned about this the other day, but now we have even a clearer picture of what is happening.  According to Capital Economics in London, this coronavirus outbreak will cause the global economy to shrink this quarter, and that will be the very first time this has happened since 2009

The economic casualties from China’s coronavirus epidemic are mounting as Asian and European auto plants run short of parts, free-spending Chinese tourists stay home and American companies brace for unpredictable turbulence.

That’s just the start of a financial hangover that is expected to linger for months even if the flulike illness is soon brought under control, economists and supply chain experts say. The Chinese epidemic’s aftereffects will likely cause the global economy to shrink this quarter for the first time since the depths of the 2009 financial crisis, according to Capital Economics in London.

And if the global economy shrinks for two quarters in a row, that will officially meet the definition of a “global recession”.

So here we are on the verge of the worst economic downturn in more than a decade, and even if this outbreak miraculously ended tomorrow it would still take quite an extended period of time for global supply chains to return to normal.

In particular, the auto industry has been hit extremely hard

The ripple effects of China’s shutdown are spreading, with the auto industry especially hard hit. Nissan temporarily closed one of its factories in Japan after running short of Chinese components, one week after Hyundai in South Korea did the same. Fiat Chrysler warned that it may shutter one of its European plants. Some U.S. manufacturers could face parts shortages in one to two weeks.

“I worry that it’s going to be a bigger deal than most economists are treating it as right now,” said Mohamed El-Erian, chief economic adviser at Allianz, the German financial services company. “It will take time to restart all these economic engines.”

Of course the global economy was already slowing down before this coronavirus outbreak started, but this has definitely helped to accelerate our problems.

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One big red flag is the fact that Caterpillar’s sales are suddenly dropping.  After “33 consecutive months of increases”, Caterpillar’s sales have now fallen for two months in a row.  In fact, January’s enormous 7 percent decline caught many analysts completely off guard…

If Caterpillar is still the global industrial bellwether and leading manufacturing sector indicator it has been for the past century (and absent the Fed somehow printing buildings or excavating mines, it is), then the world is about to enter the worst manufacturing downturn since the financial crisis.

According to CAT’s latest retail sales data, in January the company posted a 7% drop in machine sales, the biggest drop since Jan 2017, and only the second consecutive negative print since December’s -5% drop following 33 consecutive months of increases.

Across the Atlantic, major supply chain headaches have contributed to stunning factory output declines throughout the eurozone.

Just check out these numbers

Factory output fell by 4.1 percent in the final month of the year compared with the same month a year earlier, according to figures published by Eurostat on Wednesday. Germany was among the states which suffered the most, as production dropped by 7.2 percent. Italy was close behind on a 4.3 percent decrease while France was down 3.2 percent.

Those numbers absolutely scream “recession”, and they aren’t likely to get any better until this coronavirus outbreak is over.

So all eyes will continue to be on China, and right now activity in major Chinese cities is way, way below normal.  The following comes from Zero Hedge

Specifically, Morgan Stanley suggested that real time measurements of Chinese pollution levels would provide a “quick and dirty” (no pun intended) way of observing if any of China’s major metropolises had returned back to normal. What it found was that among some of the top Chinese cities including Guangzhou, Shanghai and Chengdu, a clear pattern was evident – air pollution was only 20-50% of the historical average. As Morgan Stanley concluded, “This could imply that human activities such as traffic and industrial production within/close to those cities are running 50-80% below their potential capacity.”

If the number of cases continues to rise at an exponential rate, there won’t be a “return to normal” any time in the foreseeable future.

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So barring some sort of a miracle, we should all settle in for a very long global economic downturn.

But at least one small segment of the global economy is booming at the moment.  Thanks to fears about the coronavirus, demand for private jets has absolutely skyrocketed

Wealthy travelers and major corporate clients are rejecting commercial airline travel and looking to private jets as a way to isolate themselves from the deadly coronavirus outbreak.

The uptick in interest comes as more airlines cut scheduled flights to and from mainland China and Hong Kong in the wake of the spread of the disease that originated in the Chinese city of Wuhan.

The elite are going to do all that they can to insulate themselves from this virus, and considering how easily it spreads, it is hard to blame them.

As I discussed earlier this week, a prominent medical expert in Hong Kong is warning that 60 to 80 percent of the total world population could ultimately end up catching this virus.  And if that were to happen, it would greatly escalate all of the other problems that we are currently facing.

I am still hoping that such a scenario is not going to happen.

I am still hoping that global authorities can get this horrible virus under control soon, but with each passing day it is becoming more difficult to be optimistic about this outbreak.

Article posted with permission from Michael Snyder


Michael Snyder

Michael T. Snyder is a graduate of the University of Florida law school and he worked as an attorney in the heart of Washington D.C. for a number of years. Today, Michael is best known for his work as the publisher of The Economic Collapse Blog. Michael and his wife, Meranda, believe that a great awakening is coming and are working hard to help bring renewal to America. Michael is also the author of the book The Beginning Of The End

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